Sunday, April 27, 2014

Recommended stock pick: Occidental Petroleum

Occidental Petroleum (Symbol: OXY) is one of the largest energy companies in the U.S. It operates solely as in the exploration and production of oil and gas reserves (whereas some others might be involved in refining, transmission or retailing of oil, for instance, or even all of the aforementioned). Almost two thirds of Occidental Petroleum’s production comes from the U.S., with California being a particularly important geography where it is the biggest acreage among oil companies operating. The Middle-East accounts for about one third of the company’s production without some smaller contributions from Latin America. The company specializes in unconventional oil recovery techniques, using new technology to recover additional oil from mature fields where conventional extraction methods are no longer useful. Immediate plans for the future include are to divest the California operations into a new separate company, while Occidental Petroleum focuses on the Middle East and the unconventional operations in the Permian basin, namely Texas and New Mexico.

By a lot of measures, Occidental Petroleum has worked out superbly for investors. The company has increased its dividend each year since 2002, now paying out a yield of about 2.7%. With a market capitalization of over $75 Billion, it’s the 5th largest energy company and 47th overall in the S&P 500 index. It had a market capitalization of approximately $9 Billion at the end of 2002. That said, Occidental Petroleum’s stock value has languished in recent years. It went over $110 per share briefly in 2011 before falling to just north of $70 just a few months later and has traded up and down within that range ever since. The stock price is now at $96. This is far from the prettiest picture. That said, I believe Occidental Petroleum has the markings of a profitable investment. I score Occidental Petroleum a 9-on-10 on fundamentals score, reflecting a number of improving operational and financial metrics in the past fiscal year. The company still has high gross profitability over its invested capital, even though it’s somewhat lower than in years past, specifically in the boom years that ended in 2009. It has been consistently profitable and sports a solid balance sheet with much more equity than liabilities. Currently I believe the company has a relatively low enterprise value compared to its asset value. Operating as it is and of course barring some catastrophic unforeseen circumstances, I believe Occidental Petroleum could be worth as much as the equivalent of $190 per share within 5 to 7 years, with the spinoff of the California operations possibly acting as an early catalyst for unlocking part of that value sooner. Therefore I recommend the stock as a buy.